Exchange of foreign currency
First, a loss or gain can occur when you sell foreign currency for Canadian currency. For example, say you bought some US dollars when the US and Canadian (C) dollars were trading at par. Later, you exchange US$10,000 of that amount back into C$11,000 when the currencies are trading at US1$ = C$1.10. That exchange will net you a foreign gain (FX gain) of C$1,000.
A special rule in the Income Tax Act provides that you must total all of your FX gains and losses from exchanges of foreign currency for the taxation year. The resulting total gain or loss for the year, net of the first $200 net gain or loss, is a capital gain or capital loss. In the above example, if you have no other FX gains or losses in the year, you would report an $800 capital gain, and half of that or $400 would be the taxable capital gain included in your income.
The exclusion of the first $200 net gain or loss alleviates record-keeping for persons who make relatively small FX gains or losses on exchanging foreign currency (e.g. you take one trip to the US this year and exchange only a few hundred dollars).
Purchase and sale of property with foreign currency
The Canadian income tax system uses Canadian dollars for reporting income, losses, tax, and all other amounts. As a result, you must always report the purchase price and sale price of property in Canadian dollars. A resulting gain or loss on the property upon its disposition may include an FX gain or loss.